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Australia's Experience with Economic Reform

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Australia's Experience with Economic Reform AUSTRALIA’S EXPERIENCE WITH ECONOMIC REFORM Laura Berger-Thomson, John Breusch and Louise Lilley1 Treasury Working Paper October 2018 This paper has been prepared to inform an officials level workshop at the IMF and World Bank Annual Meetings in Bali, Indonesia in October 2018. The paper will be discussed by Ms Laura Berger-Thomson and a panel including Dr Changyong Rhee, Mr Charles Abel, Dr Mohamad Chatib Basri, Mr Rodrigo Valdés and Mr Nigel Ray. This paper discusses the factors and circumstances that influenced the course of the Australian economy over the past 40 years. It will discuss challenges Australia faced and events that motivated reform emphasising aspects unique to Australia as a commodity exporting country, geographically remote with a relatively small population. 1 The authors are from the Macroeconomic Group, The Treasury, Langton Crescent, Parkes ACT 2600, Australia. Correspondence: Laura Berger-Thomson, [email protected]. We thank Cassandra Switaj and Karen Moorcroft for excellent research assistance, participants at a number of seminars at The Treasury, the Reserve Bank of Australia, Nigel Ray and other referees for their useful comments. This paper has also benefited greatly from feedback from academics and senior policy advisers, including some with first-hand experience of the reform process and its effects. The views expressed in this paper are those of the authors and do not necessarily reflect those of The Australian Treasury or the Australian Government. © Commonwealth of Australia 2018 This publication is available for your use under a Creative Commons BY Attribution 3.0 Australia licence, with the exception of the Commonwealth Coat of Arms, the Treasury logo, photographs, images, signatures and where otherwise stated. The full licence terms are available from http://creativecommons.org/licenses/by/3.0/au/legalcode. Use of Treasury material under a Creative Commons BY Attribution 3.0 Australia licence requires you to attribute the work (but not in any way that suggests that the Treasury endorses you or your use of the work). Treasury material used 'as supplied' Provided you have not modified or transformed Treasury material in any way including, for example, by changing the Treasury text; calculating percentage changes; graphing or charting data; or deriving new statistics from published Treasury statistics — then Treasury prefers the following attribution: Source: The Australian Government the Treasury Derivative material If you have modified or transformed Treasury material, or derived new material from those of the Treasury in any way, then Treasury prefers the following attribution: Based on The Australian Government the Treasury data Use of the Coat of Arms The terms under which the Coat of Arms can be used are set out on the Department of the Prime Minister and Cabinet website (see www.pmc.gov.au/government/commonwealth-coat- arms). Other uses Enquiries regarding this licence and any other use of this document are welcome at: Manager Media Unit The Treasury Langton Crescent Parkes ACT 2600 Email: [email protected] CONTENTS INTRODUCTION ...................................................................................................................................... 1 1. AUSTRALIA’S ECONOMIC REFORMS AND THEIR EFFECTS ................................................. 2 First wave of reforms ...................................................................................................................... 2 Second wave of reforms ................................................................................................................ 4 Third wave of reforms..................................................................................................................... 7 2. REFLECTIONS ON AUSTRALIA’S EXPERIENCE WITH REFORM ........................................... 8 What did the reforms achieve? ...................................................................................................... 8 Insights from Australia’s experience with reform .........................................................................12 APPENDIX: WAVES OF ECONOMIC REFORM ..................................................................................21 3. FIRST WAVE: MACROECONOMIC STABILITY ........................................................................21 Financial Sector ............................................................................................................................21 The Accord ...................................................................................................................................25 4. SECOND WAVE: MICROECONOMIC REFORM AND PRODUCTIVITY ..................................26 Phased tariff cuts ..........................................................................................................................27 Microeconomic reform in the markets for goods and services ....................................................29 Decentralised industrial relations system .....................................................................................32 5. THIRD WAVE: MACROECONOMIC MANAGEMENT AND FISCAL REFORMS .....................33 Monetary Policy ............................................................................................................................33 Fiscal Policy .................................................................................................................................34 REFORM ROADMAP ............................................................................................................................39 REFERENCES .......................................................................................................................................40 INTRODUCTION The Australian economy has been remarkably resilient over the past 30 years or so. Since the early 1990s recession, the economy has weathered a number of significant shocks well, including the Asian financial crisis in 1997-98, the global financial crisis of 2008-09 and one of the largest terms of trade cycles in the country’s history from the mid-2000s to the mid-2010s. This resilience largely reflects the flexibility in the Australian economy, which is a product of a series of macroeconomic and microeconomic reforms by successive state and federal governments that occured over the past 40 years or so. This paper examines Australia’s period of economic reform in a way that intends to be useful both for Australian policymakers thinking about future reform, and for other countries considering their own reform programs, acknowledging their circumstances may be quite different to those in Australia. Like in many other countries, the economic reforms undertaken in Australia have largely focused on opening markets to increased competition, including in the traded, financial and government sectors. These reforms have led to significant structural change. They have transformed a relatively closed and regulated economy into one that is more efficient, flexible and open, and in the process have reduced the size of industries supported by large ongoing subsidies and high tariffs, notably in manufacturing. Despite this, there is good evidence to suggest the reforms have led to an overall rise in living standards, both through raising productivity via supply-side reforms and improving demand management. The paper begins with a broad overview of the main reforms before examining what they achieved for Australia in terms of economic performance and stability. It then reflects on what insights can be drawn from the way Australia went about implementing these changes, and the factors that contributed to their development and success. In the Appendix, the paper describes Australia’s reform period in greater detail through three broad reform waves: macroeconomic stability; microeconomic reform; and monetary and fiscal policy developments. 1 1. AUSTRALIA’S ECONOMIC REFORMS AND THEIR EFFECTS For much of the 20th century, Australia’s economy was more protected and inward-looking than it is today. Domestic industry was protected from international competition by high tariffs. Iron ore exports were banned until the 1960s. Almost all wages were set by a centralised authority. The Australian dollar was pegged to the British pound and capital flows in and out of the country were tightly controlled. In markets ranging from transport to retail to dairy, the government dictated business operations such as pricing, opening hours or output. The country’s biggest bank was government owned, as were a raft of state-based banks, the monopoly telecommunications provider, the biggest airline, and power, water and gas utilities. In the financial sector, foreign banks were barred from operating in Australia and domestic banks were limited by government regulation on how much they could lend and at what interest rate. The Australian economy of 2018 looks very different. Tariffs are among the lowest in the world. Most workers’ wages are determined at the enterprise level. Australia has a floating exchange rate and an open capital account. Public ownership of trading companies or utilities is uncommon, and only in a few markets is the government involved in setting prices. Commercial banks decide how to allocate credit and face competition from foreign institutions. And, though it plays a less managerial role in the private economy, government continues to provide core public services such as universal school education
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